hard · FRM Part 2 Liquidity & Treasury Risk

Which critique BEST identifies the conceptual error in attributing the entire 250 bp to liquidity-buffer cost?

1. The spread should instead be measured against the bank's overnight funding rate rather than its 5-year rate, so the carry cost is overstated by the term premium embedded in the tenor choice.
2. Part of the spread compensates for the bank's own credit risk over a long tenor; the genuine liquidity-buffer cost is the spread of term funding over the matched-maturity risk-free rate, not over the short bill yield.
3. The 250 bp overstates the true cost because the buffer's government bills can be repo'd in the market to recover most of the funding outlay, so only the repo haircut times the funding rate is a genuine carrying cost.
4. The carry is actually a net benefit rather than a cost, since holding HQLA reduces the bank's NSFR shortfall and thereby lowers its overall marginal funding spread by considerably more than the full 250 basis points cited.

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